Budget 2016: Rural consumer to be king

Measures aimed at boosting rural incomes will result in increased spending

Finance minister Arun Jaitley’s emphasis on rural India in the Union Budget 2016-17 will help the fast moving consumer goods (FMCG) sector witness a revival in demand in the hinterlands, which had tapered in the past few years due to low agricultural yield and resultant low disposable incomes.

The government has allocated Rs 38,500 crore this year to MNREGA, compared to Rs 34,700 crore last year. The total amount allocated for rural development in the Budget is up by 10.3% from a year ago to R87,765 crore. These measures would augur well for the FMCG sector.

The Budget is positive for FMCG companies with higher rural salience. “Budgets have been allocated for increasing the crop yield, improving irrigation facilities, improving market access by providing e-commerce platforms for farmers, and better regulation of MSPs through specific initiatives like online and decentralised procurement,” said Saugata Gupta, managing director and CEO, Marico.

According to Vivek Gambhir, managing director, Godrej Consumer Products, this is a responsible ‘rural-first’ Budget that attempts to revive demand, while continuing on the path of fiscal consolidation.

Sunil Duggal, chief executive officer, Dabur India, said the finance minister has taken positive steps that will not just boost overall confidence, but will also go a long way in generating employment.

While the FMCG sector has every reason to cheer, the retail and jewellery sectors have witnessed a setback, with the FM proposing to increase the excise duty on gold jewellery to 1% (with input tax credit benefit; 12.5% excise duty with input tax credit) from nil earlier.

The government has also proposed to change the excise duty on branded readymade garments with a retail price of Rs 1,000 and above from “nil without input tax credit or 6% or 12.5% with input tax credit” to “2% without input tax credit or 12.5% with input tax credit”. These increases will result in higher prices for both branded apparel (priced above Rs 1,000), as well as gold jewellery.

Retailers feel the increase in taxes on branded apparel is disappointing at a time when the apparel industry is already going through a slowdown. This will also increase pricing differentials with unorganised or private label brands that sell below Rs 1,000, says Abneesh Roy, research analyst, Edelweiss Securities.

To discourage consumption of tobacco and tobacco products, the finance minister has proposed to increase the excise duties on various tobacco products other than beedi by about 10-15%. Roy of Edelweiss said this is not great news for tobacco companies, as it is the fifth consecutive hike.

Rural-first moves

* The total amount allocated for rural development in the Budget is up by 10.3% from a year ago to Rs 87,765 cr
* The government has allocated Rs 38,500 cr this year to MNREGA, compared to Rs 34,700 cr last year
* Budgets have been allocated for increasing the crop yield, improving irrigation facilities, improving market access by providing e-commerce platforms for farmers, and better regulation of MSPs through specific initiatives like online and decentralised procurement